ASIC weighs in on ICO craze

The Australian Securities and Investments Commission (ASIC) on Thursday released guidance on the legal responsibilities of Australian investors when it comes to participating in initial coin offerings (ICOs), just weeks after China’s government banned the practice.

An ICO is a form of crowdfunding that internet businesses use to raise capital. In exchange for cash, Bitcoin or Ethereum, the organisations offer digital tokens or coins that allow the investor to participate in a new, developing network.

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In Australia, the legal status of an ICO is dependent on its circumstances, and ASIC has said an ICO could be a managed investment scheme, an offer of shares, an offer of a derivative, or a non-cash payment facility.

But, as ASIC points out, ICOs can be conducted anonymously and there is almost zero protection for investors swapping money for ICO tokens.

«ICOs are highly speculative investments, are mostly unregulated, and the chance of losing your investment is high,» ASIC commissioner John Price said.

«Consumers should understand the risks involved, including the potential for these products to be scams, before investing.»

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In some circumstances, the ICO will be subject to general Australian consumer laws. In others, the ICO may be subject to the Corporations Act.

Bitcoin’s value has exploded over the past year, rising as much as 700 per cent. Photo: Bloomberg

It depends on what rights are attached to the individual token. These rights are generally outlined in the «white paper» that accompanies the ICO. While not the same thing, a white paper could be thought of as the prospectus to an IPO.

But, as ASIC points out, should the white paper exclude vital information or mislead investors, they will have no right to withdraw their investment before the shares are issued, a protection that exists where organisations issue a prospectus.

«If the token falls within the definition of a financial product, then the tokens, issuing body and any exchange they are listed on are subject to the existing framework,» Gilbert and Tobin partner Peter Reeves said.

«If the tokens are not financial products, then investors will need to closely consider the ICO documentation as the investor protection regime under the Corporations Act will not apply.»

Earlier this month, Chinese authorities banned ICOs and then forced the closure of some of the world’s biggest Bitcoin exchanges. The People’s Bank of China said ICO speculation was likely linked to «illegal financial activities [which] seriously disrupt the economic and financial order».

While some ICOs have raised eye-watering sums in next to no time, there have been some cases of alleged theft. In July, CoinDash said its website was hacked and roughly $US7.4 million in cryptocurrency was stolen from investors trying to take part in its ICO. The same month, Veritaseum said it was hacked and a similar attack reportedly followed against Enigma last month.

ASIC defines crowdfunding as a financial service, and from Friday, unlisted companies with less than $25 million in assets and annual revenue can issue shares to retail investors over a crowdfunding platform, using an offer document that contains less disclosure than a prospectus demands.

The regulator also points out those facilitating ICO transactions may be operating as a financial market and must obtain a licence or be declared exempt by the minister.